Integration of Cost Object Controlling

The application component Cost Object Controlling is integrated with a number of other application components
including external accounting, further components in Controlling, and various application components in
logistics such as Production Planning (PP) and Materials Management (MM). This section explains how Cost
Object Controlling is integrated in the R/3 System. This is illustrated using the example of a manufacturing
company.
Cost Object Controlling receives a wide range of information from other application components and also feeds
data to these components.

Data Used by Cost Object Controlling

 Direct costs are costs that can be assigned directly to particular cost objects. Direct costs are posted
usingprimary cost elements. This means that these cost elements have matching expense accounts
in Financial Accounting. A posting to an expense account therefore results in a cost that can be traced directly
to a particular cost object. For example, the costs for an external activity provided by a supplier can be
allocated directly to a cost object. This requires the incoming invoice to be assigned to the cost object. If the
incoming invoice is entered inFinancial Accounting (FI), the costs are immediately allocated to the cost object.
An example of a direct cost is a direct materials cost. When a raw material or semifinished product is withdrawn
from inventory to be used in manufacturing a finished product, a posting is generated to an expense account
inFinancial Accounting. The relevant expense accounts are Raw Materials Consumption and Semifinished Goods
Inventory Change.
You enter material withdrawals (called goods issues) in the application component Materials Management (MM).
Such goods movements in MM automatically generate postings in FI. For raw materials, the system
debitsConsumption of Raw Materials and credits Raw Materials. For semifinished products, the system
debitsSemifinished Goods Inventory Change and credits Semifinished Goods Inventory. The direct materials
costs are allocated to the cost object. The amount allocated is the same as the expense posted in FI.
Indirect costs are costs that cannot be assigned directly to particular cost objects. An example of an indirect
cost is the cost of electricity for a machine that produces different products. Indirect costs are usually first
allocated from financial accounting to the cost centers (see also: Cost Center Accounting).
Cost centers are areas that perform defined activities for other cost centers or cost objects. These activities are
valuated and updated using secondary cost elements. A secondary cost element is a cost element that does
not have a matching expense account in Financial Accounting. Secondary costs are therefore valuated
consumptions of internal activities. (Internal activities are activities that are performed inside the company
rather than purchased from outside.)
Indirect costs are also called overhead costs.
Sometimes cost centers also assign direct costs to the cost objects. This is so that the costs incurred at the cost
centers can be monitored. The direct production costs (direct labor) are allocated from the cost centers to the
cost objects.
An activity performed at a cost center can have a number of different components. For example, one hour of
the activity type painting consists of the direct labor of the painter and the hourly rate of the painting machine.
The value of a unit of activity of a particular type is called the price. A price can consist of both fixed costs and
variable costs. Fixed costs are independent of the operating level, while variable costs vary with the operating
level.
In the R/3 System, indirect costs can be allocated to cost objects with a number of different methods:
Internal activity allocation
Overhead rates
 Allocation of process costs
Internal activity allocation credits the cost center and debits the cost object. Internal activity allocation can be
started manually in the menu of Cost Center Accounting or Cost Object Controlling. You can also start internal
activity allocations through other business transactions. This means that the system automatically generates
internal activity allocations when operations are confirmed in Production Planning (PP).
You can also link the PP confirmation to a goods movement in MM. When the confirmation is entered in PP, the
system can generate a goods issue in MM in addition to the internal activity allocation. Confirmations in PP then
cause a posting in FI in addition to the activity allocation in Cost Center Accounting (CO-OM-CCA). In repetitive
manufacturing, you can also start activity allocations through goods receipt postings.
Overhead allocation credits the cost center and debits the cost object. You perform overhead allocation in the
period-end closing process of Cost Object Controlling. You can allocate processes manually or through
automatic process allocation. Processes can be charged with primary and secondary costs.
Allocation of process costs credits the process and debits the cost object. Automatic process allocation is
started by template allocation and is performed in the period-end closing of Cost Object Controlling. Template
allocation also enables you to allocate activity types. The cost center is credited and the cost object is debited.
Cost objects can also be debited by repostings.

Even if you dont implement the entire range of activity-based costing functions (CO-OM-
ABC), you can still use templates to allocate overhead.
See also:
Templates
Activity-Based Costing

Primary and secondary costs are allocated to cost objects under the cost element of the secondary or primary
cost, including the origin if desired (such as the material number and plant). You can view and analyze costs on
cost objects at any time.

The R/3 System can also access this data during the planning stage. Cost estimates at the
material level are created in the application component
Product Cost Planning. Preliminary cost estimates for cost objects are created in the application componentCost
Object Controlling (see also: Sequence of Steps in Cost Object Controlling: Scenario ).
Data Generated by Cost Object
Controlling

* Only supported in Product Cost by Sales Order

Cost Object Controlling also generates its own data and sends it to other application components.

Here, too, functions in other application components can generate data in Cost Object Controlling and in other
application components. For example, when a finished product is transferred to inventory, you enter a goods
receipt in MM. This goods receipt generates a posting in FI (Finished Goods Inventory is debited and Inventory
 Changeis credited). This in turn credits the cost object. The inventory level in FI is increased. You can also
automatically create this goods receipt when you confirm in PP.

Semifinished products and finished products should be valuated with the standard price (see
also:
Basic Decisions in Cost Object Controlling). If the price control indicator in the master record for semifinished and
finished products is set to S (standard price), this has the following effects:
The materials are valuated at the standard price when they are transferred to inventory.
The total inventory value is therefore the quantity of material in inventory multiplied
by the standard price.
The materials are withdrawn at standard price when you enter a goods issue.
The standard price is usually calculated in a standard cost estimate for the material
that you have created in the application component Product Cost Planning.
In some cases, costs may be incurred for a material before all (or even any) of the planned quantity has been
produced. This means that an expense is recorded in FI that reduces the profit, even though this expense is
part of the value-added process. To account for this, the value of the unfinished products (
work in process or WIP) can be calculated during the period-end closing process in Cost Object Controlling and settled
to FI. This settlement debits the work-in-process inventory account and credits the work-in-process inventory change account.
Because the profit in Profit Center Accounting (EC-PCA) is usually calculated using period accounting, the work in process
can also be transferred into EC-PCA.
Reserves (such as for unrealized costs) also can be transferred to FI and EC-PCA.
See also:
Work in Process in Product Cost by Period
Work in Process in Product Cost by Order
Settlement in Product Cost by Order or Period
Profit Center Accounting
Differences that exist on the cost object between the debit (posting of actual costs) and credit (delivery of
finished products to inventory) also are transferred to FI. Settlement ensures that the actual costs (and not just
the standard costs) are reported in FI. Settlement can also transfer the price difference to EC-PCA and Actual
Costing/Material Ledger. This amount is also settled to Profitability Analysis (CO-PA), usually broken down into
variance categories.
See also:
Variance calculation

Note that not all costs entered in cost accounting have corresponding
expense postings in financial accounting. Cost accounting often uses what
are called imputed costs. There are different types of imputed costs:
Costs for which there is a different expense amount in financial accounting. These are
called valuation differences. Example: imputed depreciation charges based on the replacement value.
Costs for which there is no corresponding expense in financial accounting. These are
called additional costs. An example of an additional cost is imputed rent for factory premises owned by your
company.
A cost that is the same as the expense posted in financial accounting is called a basic cost.
Imputed costs are often one of the reasons the inventory values calculated in Product Cost
Controlling are not used for valuation purposes in the annual balance sheet.
See also: For information on balance sheet valuation, see Inventory Costing.
In Profitability Analysis (CO-PA) the costs and revenues can be analyzed at the market segment level (such as for a
particular product group or distribution channel in a particular region). In make-to-stock environments, in sales-order-related
production with a valuated sales order stock, and in engineer-to-order environments with a valuated project stock, the revenues
and the standard cost of goods manufactured of sales are transferred to CO-PA when the customer is invoiced. The standard
cost of goods manufactured is calculated in the application componentProduct Cost Controlling. The cost component
split (the breakdown into cost components) of the standard costs can be viewed in CO-PA. The purpose of CO-
PA is to determine contribution margins. This is done by comparing the revenues against the standard costs and
against other costs as well. Therefore you settle the variances to CO-PA as well. When you settle the cost
objects, you can transfer the variances (broken down into variance categories) to the value fields of CO-PA.
In Product Cost by Sales Order, you can also calculate additional results analysis data that can be settled to
CO-PA.
See also:
For information on valuated sales order stocks, refer to the section
Valuated Sales Order Stock.
For information on calculating results analysis data that can be transferred to CO-PA (such as reserves), refer to
the section
Results Analysis.
For information on engineer-to-order environments, refer to the documentation Project System.
For information on the limitations involved with nonvaluated sales order stocks, refer to the section
Special Case: Nonvaluated Sales Order Stock.
If you dont want to valuate your inventories at standard cost during the year, or if the laws in your country do
not allow you to do so, you can valuate your inventories at actual cost by activating the application component
Actual Costing/Material Ledger (CO-PC-ACT). In this case, the price differences are settled to CO-PC-ACT as well,
and are used there to determine the periodic unit price.
See also:
Master Data of CO in Cost Object Controlling
Master Data of PP in Product Cost Controlling
Checking the Production Planning Master Data Before Costing
Master Data of PP-PI in Product Cost Controlling
Actual Costs in Cost Object Controlling

I want to include Labor as an item in the Bill of Material along with other direct expenses to properly cost our production items into
inventory. If I include labor in the bill of material it will put the expense into the general ledger. When the payroll costs from ADP come
in the expense is applied to the same G/L account which then doubles the Labor costs.

Do we need to accrue each direct cost then apply the true costs when the bills come in? How else can you get the true cost of
produced inventory?

The concept of Labor & Factory Overhead (FOH) relate to Cost Accounting Literature.

Anyhow, first of all you have to add Applied Labor & Applied FOH as two separate items in Item Master Data with Issue Method as
Backflush in General Tab. Use Standard Cost in Valuation Method in Inventory Data Tab and then put in the Item Cost for each of
Applied Labor & Applied FOH. Now add these items (Applied Labor & Applied FOH) in the Bill of Materials (BoM) with Issue Method set
as "Backflush". Upon posting Receipt from Production document the following JE would be posted automatically in which Labor & FOH
would be charged to the Finished Goods Cost (either directly or through Work in Process):

Finished Goods Debit

Applied Labor Credit

Applied FOH Credit

Whereas when actual salary or actual factory expenses are incurred then following JE posted:

Salary Expense / Other Expense Debit

Cash / Bank / Expense Payable Credit

Now suppose if the actual Salary expense is greater than the Applied Labor then the JE to be posted: (this JE may be posted at the end
of each Month or Just at the end of the Accounting Year)

Labor Variance Debit

Applied Labor Debit

Salary Expense Credit

Hence both Applied Labor & Salary Expense GL accounts would have zero balance at end of Accounting Period.